RIO DE JANEIRO, Brazil -- Social security reform plans are a key part of the government's efforts to reduce Brazil's huge budget deficit and boost investor confidence, and thus reduce the likelihood that Brazil's economy will collapse.
On Nov. 4, Congress passed a social security amendment linking eligibility to age, as well as years of contribution. In the past, only years worked were considered.
The amendment -- the biggest spending-cut reform of the $23.2 billion fiscal package that was announced in late October by President Fernando Henrique Cardoso -- will curb payouts by $2.5 billion next year, $5 billion in 2000 and $7.3 billion in 2001.
The cuts are crucial in curbing the social security program's total deficit of $35 billion, which is 54% of the total public budget deficit of $65 million, or 7.2% of the GNP.
"Passage of the social security amendment, the first item of the fiscal reform package to be approved by Congress, not only cuts social security and fiscal deficits, but begins to restore investor faith that the rest of the fiscal package will be approved," said Creston Portilho, the press spokesman for ABRAPP, the national association of Brazilian pension funds.
"Passage of the amendment also provides an impetus to get Congress to approve the harder-to-approve $13.1 billion of proposed tax hikes, among them a civil servant social security tax hike proposal in the fiscal reform package."
For those entering the system, men must be 60 years old and have contributed for 35 years to get benefits, and women must be 55 years old and have contributed for 30 years. For public civil servants already in the system, men must be 53 years old and have contributed for 35 years, and women must be 48 years old and have contributed for 30 years. For private-sector employees already in the system, eligibility comes with no age requirement, only the stipulation that men have contributed for 35 years and women have contributed for 30 years.
The government feels that two congressional defeats dealt earlier this year to proposals involving age eligibility and benefit levels seriously limit its ability to cut payouts (Pensions & Investments, July 27). Thus it plans to attempt to persuade Congress early next year to restore the age eligibility requirement for private-sector employees and to pass a benefit-limiting clause.
The part of Mr. Cardoso's fiscal package that proposes a hike in civil servant social security taxes faces a Promethian battle in Congress. The package increased social security taxes on higher-paid civil servants from 11% to 20% on earnings over $1,000 per month. The package also proposed an 11% tax on payouts to retirees, and a 20% tax on payouts that exceed $1,000 per month.
Congress has particularly balked at the tax proposal because it forces retirees to continue paying into the system. For that reason, along with the difficulty of getting any tax hike passed, that body is likely to vote down the tax on civil servant retiree payouts or to strike a deal reducing that tax, to insure the fiscal package's passage.
"The government is going to have a hard time convincing Congress to pass the civil-servant, social-security tax hike proposal, especially the new tax on civil servant retiree payouts," said Rogerio Studart, an economist who teaches at Rio de Janeiro's Federal University.
"But these tax hike proposals, as well as the rest of the fiscal package, need to be implemented if the government is to curb the budget deficit. Only then will the government increase local and foreign investor confidence in the economy, thus keeping reserves from dropping further, which would again put the economy in jeopardy."
The government argues that the proposed taxes -- the two biggest revenue-generating taxes of the fiscal package -- would save $1.1 billion in 1999, $3.5 billion in 2000 and $3.6 billion in 2001. On the eve of announcing the fiscal package, Mr. Cardoso argued on television that these taxes, to be in effect for five years, are justified because public-sector social security payouts have created a $15 billion shortfall this year.
MORE TAXES, LESS SPENDING
The overall fiscal package, which includes $13.1 billion in tax hikes, $7.2 billion in spending cuts and $2.9 billion in reforms, was announced Oct. 28, shortly after Brazil's shaky economy -- mainly a perilously high public budget deficit -- triggered massive capital flight that caused the country's reserves to plunge from $72 billion in late August to $43 billion by the end of October.
The package stemmed capital flight, decreased a devaluation risk and qualified the country for a $30 billion to $40 billion IMF emergency credit line. The government plans to use the IMF rescue funds if reserves drop perilously low (say, under $20 billion).